Degrees of separation: what ties permit one company to claim benefits under a policy issued to another company?

One of the biggest current concerns in insurance is corporate connections. Much like people, policyholder companies are often connected by only a few degrees of separation. Companies are tied together through mergers, acquisitions and asset purchases. A company existing today might, in some ways, be tied to a company that was insured in 1980. But can today's company claim insurance under the 1980 company's policy? More generally, what ties allow one company to claim benefits under an insurance policy issued to another company?

In 2003, the California Supreme Court issued a decision concerning this issue that I discussed in an earlier column. The decision, Henkel Corp. vs. Hartford Accident and Indemnity Co., found for the insurance carriers. In Henkel, the named insured sold some of its assets. The purchasing company evolved into Henkel. Ultimately, Henkel claimed coverage under the policies of the company that sold its assets.

The court found that Henkel was not entitled to the coverage, a significant victory for insurers. The court found that: the asset buyer was not the corporate successor; the named insured had not assigned its coverage; and clauses requiring consent for corporate assignments are enforceable.

With the benefit of living with Henkel over the past two years, we can identify several lessons.

Insurance carriers must carefully review claims of corporate succession. Companies claim to be successors based upon a wide variety of connections. But not all connections constitute succession, and not all connections form a basis to claim coverage. The company claiming coverage in 2005 may well have a connection to the company that was insured in 1980, but that connection may not be sufficient to give the later company the right to coverage. Connected does not necessarily mean covered because only some connections transfer the coverage. Insurance carriers must, therefore, carefully examine claims to succession.

Insurers' examinations of claimed successions should consider--among other factors--whether the connection is based upon a merger or an asset purchase. Mergers will often present connections that are sufficient to allow the surviving company to claim coverage under the policy of the earlier company. Asset purchases, however, present coverage claims that are far more questionable. Moreover, distinctions should be made between purchases of some assets and purchase of all assets. Ultimately, specific circumstances and state law must be considered.

Insurers also must examine claimed insurance assignments. Most policies require assignors to obtain their insurers' consent. The requirement is clear, and the Henkel court enforced it. Thus, assignments must be checked.

Here, there is also a lesson for policyholders: When handling a corporate transaction, seek the insurers' consent to any insurance assignments. Skeptics will say that insurers never consent. Not true. I have seen many policies with endorsements in which insurers consented to changes in the status of the named insured. Some insurers may want to establish a relationship with the new entity. Other insurers may offer to extend the coverage in return for an additional premium; and that premium may be a worthwhile expenditure for the evolving company. But most importantly, policyholders should not dismiss the possibility of obtaining consent and perfecting an assignment of coverage.

Both insurers and insureds must check the controlling state's law. In my view, Henkel was a good decision. The requirement that policyholders obtain insurers' consent to assignments is perfectly clear, and it was appropriate for the California Supreme Court to enforce clear policy language. But I must admit that some courts do not like this approach at all. The Henkel approach was expressly rejected by an appellate court in Ohio (Glidden vs. Lumbermens Mutual). Consequently, when facing questions as to whether a company can claim to be the named insured, identify the applicable state law and examine it.

Finally, I note that some had argued that by enforcing the limitations on insurance succession claims, the Henkel decision would stifle corporate transactions because it would create uncertainty as to insurance coverage. This "public policy" argument has been used to attack the Henkel approach. But despite the fear that corporate transactions would be disrupted, I don't see that Henkel creates uncertainty, and I certainly don't see evidence of any disruption in business transactions. Mergers, asset purchase and other aspects of corporate evolution continue seemingly unabated.

The Henkel issue is an important concern for both sides of the insurance aisle. Policyholders need to consider the issue when structuring their transactions. And insurers need to closely review claims that are based upon corporate succession.

Alan S. Rutkin, a Best's Review columnist, is a partner in Rivkin Radler LLP, Uniondale, N.Y. He may be reached at [e-mail].